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State Treasurer Delivers Revised Revenue Estimates to Assembly Budget CommitteeMuoio: May reality check - no April surprise. Structural imbalance persists due to declining General Fund revenues.

TRENTON – State Treasurer Elizabeth Maher Muoio appeared before the Assembly Budget Committee on Monday to present revised revenue estimates for both FY18 and FY19 and relayed a sobering message on New Jersey’s accelerating structural budget imbalance, precipitated in large part by a number of tax changes made under the previous administration.

“Despite our best wishes, there is no April surprise. Instead, we have a May reality check – a reality check on the urgent need for new revenues,” Muoio said during her testimony. “We must take action to correct our serious structural deficit and structural fund imbalance. General Fund revenues are simply not keeping pace with our obligations.”

Muoio underscored the fact that General Fund revenues are growing much more slowly and in many cases actually declining. FY19 projections for the Sales and Use Tax, the Corporation Business Tax, and most of the other revenues that support the General Fund have been reduced from the Governor’s Budget Message forecast delivered in March, due to revised downward adjustments to FY18 collections. While the Gross Income Tax (GIT) is propping up Fiscal Year 2018 total revenues - accounting for three-quarters of aggregate growth - the GIT is constitutionally dedicated to the state’s Property Tax Relief Fund.

“Without the bold actions recommended by the Governor, projections suggest we would end FY18 with little-to-no reserves in the General Fund, which supports more than 55 percent of the state budget,” added Muoio. “Without our proposed changes, projections for FY19 are on a trajectory for a General Fund deficit of $2.4 billion. What this means is that assuming no new revenue initiatives and no new spending, other than trend revenue and trend appropriations growth, and assuming a year-end surplus of two percent of budgeted appropriations, we are on track for a General Fund deficit of $2.4 billion.”

Muoio noted that the state is not constitutionally allowed to run a deficit, highlighting the need to avoid this scenario by implementing a number of the Governor’s budget proposals.

The Treasurer went on to note that legislation enacted in 2016 and 2017 exacerbated this problem dramatically by reducing and shifting significant revenues out of the General Fund, creating an unsustainable structural imbalance that can no longer be ignored.

As part of the agreement in 2016 to raise the gas tax to fund the depleted Transportation Trust Fund, the state sales tax was reduced by several tenths of a percentage point and the estate tax phased out. As a result, General Fund revenues are on track to be reduced by half a billion dollars this fiscal year and by one billion dollars next fiscal year. The decision to dedicate Lottery revenue to support the state’s pension funds also shifted an addition billion dollars out of the General Fund.

Muoio also underscored the fact that 98 percent of new funding proposed in the Governor’s budget is a direct investment in education and NJ Transit, two universally acknowledged priorities that have been hollowed out over the last eight years.

The Treasurer ended by imploring lawmakers to “get together and address our funding needs and our structural deficit in a way that is sustainable and will allow us to grow our economy and invest in the future.”

Below is a full copy of Treasurer Muoio’s testimony, as prepared for delivery:

Good afternoon, Chairwoman Pintor Marin, Vice Chair Burzichelli, Budget Officer DiMaio, members of the committee. Thank you for the opportunity to come before you again to present an update on revenue forecasts and their impact on the Governor’s proposed Fiscal Year 2019 Budget.

First, I’d like to again introduce my colleagues here at the table with me - Deputy Treasurer Catherine Brennan, Acting Director of the Office of Management and Budget (OMB) David Ridolfino, Senior Assistant Director of OMB Carisa Marone, and Director of the Office of Revenue and Economic Analysis (OREA) Martin Poethke.

We have a fantastic team and they’ve done a great job putting together the detailed analysis I’ll be providing you with today. You’ll be happy to know I plan on keeping my remarks briefer this time.

However, I would be remiss if I did not quickly acknowledge my gratitude and appreciation to the division directors, management, senior Treasury staff and the chief officers of the many “in but not of” agencies funded and supported by our Department – most of whom are with us today.

They worked with great diligence over the past four months to ensure that the duties and obligations of the Department of the Treasury were carried out effectively during the start of a new administration. The scope of work provided by our Department impacts every state agency and, by consequence, every resident in the state. So I thank them for their service to our state.

When I came before you in April, I had a sobering message to deliver. Six weeks later that message remains just as sobering and it is predicated on our revenue situation.

The good news is that overall revenues remain close to the targets we projected for FY18 and FY19. The more troubling news is that our structural budget difficulties are accelerating. Before I get into more detail on this, I want to discuss the major revenue developments since we last met.

So first I’d like to turn to our FY18 revised revenues.

The Gross Income Tax (GIT) continues to be the strongest performer so far in FY18, up in total by 9.1 percent through the end of April compared to the same months last year. Collections in April, always the largest month of the year for the GIT, were down 1.0 percent. As we discussed last month, this slow-down was anticipated due to several key factors. Chief among them, is the roughly $200 million in taxes that we estimate were pre-paid in December due to changes to federal tax law which would otherwise have come in during the month of April. As you will recall from my testimony approximately six weeks ago, this shift was expected and built into our estimates. Also holding down April revenue collections was the doubling of the GIT retirement exclusion beginning in tax year 2017, which may have accounted for as much as $90 million in lost revenue in April.

Absent these two factors, April GIT collections might have grown by more than 10 percent.

While April’s net GIT cash collections were down 1.0 percent, we do expect to see improvement in May and June thanks to solid growth in withholding and quarterly estimated payments. For the remainder of FY18, we anticipate historically above-average growth of 6.6 percent. FY18 is now projected at $15.153 billion, 8.6 percent ahead of last year and a $173.2 million increase over the revised estimate in the GBM.

However, while the GIT is propping up FY18 total revenues - accounting for three-quarters of aggregate growth - General Fund revenues are growing much more slowly and in many cases actually declining.

Turning next to our largest source of General Fund revenue - the Sales Tax - growth has been steady, slow, and on target. Due to the rate reduction to 6.625 percent, the State’s second largest tax revenue is up only 1.6 percent through the end of April. Our revised forecast is essentially unchanged and we project to end FY18 about 1.0 percent ahead of FY17, yielding a total of $9.545 billion.

Our most disappointing revenue source is the Corporation Business Tax (CBT). Ten months into the fiscal year, collections are down 1.9 percent through the end of April. While April rebounded from very weak performances in February and March, the prospects for the remainder of FY18 are not good. What’s crucial to note is that estimated payments in April were down 16%, suggesting that the important June estimated payments will also be down. Accordingly, we have reduced the CBT estimate to $2.069 billion, down by $131.1 million from the revised target included in the Governor’s Budget Message, the GBM. We suspect corporate tax planning may have resulted in income shifting into future years.

Just as concerning, the CBT for banks and financial institutions is also underperforming. April receipts were down 25% and year-to-date this tax is down 28.5%. Consequently, we have reduced the FY18 forecast by $24.6 million.

Most other smaller General Fund revenues are also weaker than forecast through the end of April. Accordingly, we have reduced the forecast for the following:

The Realty Transfer Fee is reduced by $20.6 million

The Realty Tax on properties valued over $1 million is reduced by $28.8 million;

Cigarette revenue is down by $11.5 million; and

Casino revenues are down by $4.6 million;

The only notable increase is the insurance premiums tax, which we have revised upward by $72.0 million.

The estimate for the petroleum products gross receipts tax is also reduced by $81.7 million, impacting deposits into the Transportation Trust Fund, which, along with Legislative Budget and Finance Officer Frank Haines, we will continue to monitor.

Moving on to our revenue projections for FY19. Total FY19 budgeted revenues are projected to grow by about $2.0 billion, with the Governor’s proposed new revenue initiatives accounting for three-quarters of this growth. As we’ve stated, these initiatives are essential to ensure a more fiscally responsible surplus, meet our pension obligations, and invest in shared priorities such as education and our transportation infrastructure.

When it comes to the Gross Income Tax – our largest tax revenue source – it is projected to grow by $1.26 billion in FY19, up 8.4 percent from FY18. We have accordingly raised our FY19 forecast $190.1 million above the estimate in the GBM due primarily to the increased forecast in the FY18 base. About half of this total growth, or 4.1 percent, comes from that underlying baseline, reflecting continued moderate wage and employment growth and solid gains from non-wage income sources. Another 4.3 percent comes from the Governor’s proposed tax changes.

Turning to General Fund revenues - the Sales and Use Tax projection is down $54.1 million from the GBM, due to a slightly lower growth rate for FY19, bringing it more in line with current performance. However, the restoration of the 7.0 percent sales tax rate and the broadening of the taxable base will add $597 million to those base revenues.

Our second biggest General Fund revenue - the Corporation Business Tax – has also been reduced. Our CBT forecast is now lowered by $170.7 million from the GBM, due mostly to a reduction in FY18 base revenues. Nevertheless, CBT revenues are projected to grow by $197 million, or 9.5 percent in FY19. As I mentioned in my previous budget presentation, baseline growth of 4.2 percent is boosted by anticipated corporate tax behavior that shifted income into Tax Year 2018. However, growth is also held back by growing use of various state tax credits.
The estimates for most of the other revenues that support our General Fund have also been reduced from the GBM forecast due to the reduced base estimated for FY18. The CBT on banks and financial institutions is down $26.4 million, the realty transfer fee is reduced by $16.3 million, the realty tax on properties valued over $1 million by $22.1 million, the transfer inheritance tax by $19.5 million, cigarettes by $35.2 million, and motor fuels by $2.4 million. The forecast for the insurance premiums tax is revised upward by $72.0 million.

Finally, for FY19 we have added an estimate of $13.0 million for the projected impact of sports betting. While legislation is still pending, credible market observers and our tax analysts expect this emerging gaming market to provide as much as $124.0 million in taxable earnings. Based on tax rates
varying between 8 and 15 percent, sports betting is projected to yield about $13 million in revenue for the State.

Structural Issues

As we discussed six weeks ago, the strong growth in the GIT contrasts sharply with the weak growth in General Fund revenues. For a number of years, trend growth in General Fund appropriations has been outstripping General Fund revenue growth. Legislation enacted in 2016 and 2017 exacerbated this problem dramatically by shifting significant revenues out of the General Fund, creating a serious structural issue that can no longer be ignored.

Without the bold actions recommended by the Governor, OMB’s projections suggest we would end FY18 with little-to-no reserves in the General Fund, which supports more than 55 percent of the state budget. To be clear, Property Tax Relief Fund (PTRF) reserves cannot be used to cover General Fund expenditures. This requires immediate action.

To mitigate this structural imbalance, for both FY18 and FY19 the administration is proposing to move $788.5 million in Energy Tax Receipts revenue from off-budget to on-budget. Since this revenue is realized from the sales tax imposed on energy producers, it can be deposited into the General Fund. To ensure municipalities still receive the same level of funding, the same $788.5 million will be appropriated from the PTRF.

Moreover, since this appropriation has already been paid out to municipalities for FY18, this accounting adjustment is just that – an accounting adjustment. It will have NO impact on the locals and the administration is committed to providing the municipalities with an equal level of support in FY19. This accounting fix will ensure the State budget remains functional moving forward both in the current year and in future budget years.

Without our proposed changes, projections for FY19 are on a trajectory for a General Fund deficit of $2.4 billion. What this means is that assuming no new revenue initiatives and no new spending , other than trend revenue and trend appropriations growth, and assuming a year-end surplus of two percent of budgeted appropriations, we are on track for a General Fund deficit of $2.4 billion. This, of course, is not constitutionally permissible, and we cannot allow it to happen – underscoring the need for the ETR shift.

Taking all this into account, it’s time to have a serious discussion.

Despite our best wishes, there is NO April surprise. Instead, we have a May reality check – a reality check on the urgent need for new revenues.

We must take action to correct our serious structural deficit and structural fund imbalance. General Fund revenues are simply not keeping pace with our obligations.

This is not about pointing fingers because many in both parties have contributed to this problem. I remember. I was there. Many at the time raised concerns about the consequences – the consequences of reducing the sales tax, the consequences of phasing out the estate tax, and the consequences of dedicating the gas tax.

There were lengthy discussions during caucus meetings and heated debates on the floor, but at the end of the day we were left with few options by Gov. Christie. Our infrastructure was failing. Gov. Christie had shut down transportation projects and sent many to the unemployment line. We were forced to compromise in order to solve our Transportation Trust Fund problem.

Now there is nowhere else to kick the proverbial can.

The problems we have are systemic and they will haunt us every year unless we take bold action.

Revenue from sports betting will not sustain us. Neither will remote sales. Neither will the gimmicks of the past that were once used to buy time - they have all been exhausted.

The Governor’s proposed budget buries the irresponsible notion that skipping or reducing pension payments is acceptable, proposing the largest single-year payment in state history of $3.2 billion – a key concern of ratings agencies.

It reduces our reliance on one-shot funding to a 15-year low of less than one percent – another major concern for ratings agencies.

And, it boosts our proposed surplus, or rainy day fund, by 50 percent over last year to $751 million – another priority for ratings agencies, not to mention this administration, which is committed to preventing further downgrades.

While I’m on the topic of our surplus, we all know how New Jersey struggled, and continues to struggle, to return to our pre-recession growth rates. I spoke at length about it during my initial budget presentation. The states that rebounded from the recession the quickest last time were those with the healthiest surpluses. I want to point out that even though we are proposing to boost our surplus by 50 percent next year, it will still only comprise roughly 2 percent of our budget. By contrast, in 2007 our surplus was roughly 8 percent of our budget. So, it’s important that we maintain a healthy, adequate surplus in the event of another economic downturn.

What all this means is that we MUST fix our structural problem. There are no gimmicks to rely on anymore.

We will not get to a positive budget position this year – or in the foreseeable future:

If we don’t find other innovative ways to create SUSTAINABLE revenue streams.

If we don’t bring Energy Tax Receipts on budget; and

If we don’t restore the sales tax to its previous rate.

Simply put, we need General Fund solutions. Otherwise, everyone must be prepared to get out the red pen and make draconian cuts - cuts that will pale in comparison to what we’ve seen over the last eight years.

For those who think that’s an easy solution, keep in mind the many departments that have come before you over the last few months. When they were pressed on issues about why they have failed to meet some metric or carry out some mission, they have consistently pointed to the difficulty in achieving various goals because staff or resources have been hollowed out over the last eight years.

Maintaining the status quo simply will not work anymore. As I said last month, even with no new spending initiatives and all legislative add-ons backed out, we will still be running a deficit without new revenue streams.

This leads me to another point I want to emphasize because I think it’s been largely overlooked. There has been too much emphasis on the difference of opinions that exist, which is par for the course during budget season. But, what we’ve heard very little about is the commanding consensus that has emerged on the investments we MUST make right now.

After eight years of chronic neglect, nearly everyone is in agreement that we must reinvest in the things that have historically made New Jersey a national leader - by breathing new life into our crumbling public transportation system; by infusing increased, equitable funding into our school system; and by boosting payments to our public pension system to reduce our unfunded liabilities and bolster our credit rating.

In all of my discussions since becoming Treasurer, I have yet to come in contact with anyone who disagrees with the need to invest in these key areas – and I mean on both sides of the aisle and across the stakeholder community.

Despite all the talk about new spending in the proposed budget what has been ignored is the fact that more than three-quarters of the total $661 million in new appropriations will support these universally shared priorities. In fact, $649 million – or 98 percent of this new spending - is a direct investment in education and NJ Transit.

But, the pathway to investing in our shared priorities is mired in some hard truths.

Do we continue kicking the can down the road?

Or do we finally get together and address our funding needs and our structural deficit…in a way that is sustainable and will allow us to grow our economy and invest in the future?

If it’s not the latter, then we will be right back here next year wondering how we dug ourselves deeper into a hole.

Again, I thank you for the opportunity to come before you today and I’m happy to answer any questions you have right now. As I noted, many of our division directors and the heads of our “in but not of” agencies are also here and they’ll be happy to answer any questions you might have on issues that fall under their purview.